How Grandparents Can Help Pay for College

Many grandparents wish to help their grandchildren achieve higher education goals. Financial support for college can come in various forms, each with its own considerations regarding tax implications and potential effects on financial aid eligibility. This guide provides an overview of methods available for grandparents to support college expenses, from direct payments to specialized savings plans.

Direct Contributions and Payments

Grandparents have several options for providing financial assistance for college, including direct cash gifts and direct payments to educational institutions. Each approach carries distinct tax treatments that can influence reporting to the IRS.

Grandparents can give cash directly to a grandchild or their parents. For 2025, an individual can gift up to $19,000 per recipient without triggering gift tax reporting requirements or reducing their lifetime gift tax exemption. This annual gift tax exclusion applies on a per-person basis. If married, both grandparents can each give $19,000 to the same grandchild, effectively doubling the tax-free amount to $38,000 annually. Gifts within this annual exclusion limit do not require filing a federal gift tax return (Form 709).

Tuition payments made directly to an educational institution offer a distinct advantage. Under Internal Revenue Code Section 2503(e), amounts paid directly to a qualifying educational organization for tuition are not considered taxable gifts, regardless of the amount. This unlimited exclusion applies only to tuition, not to other college-related expenses such as room and board, books, or fees. Grandparents can pay a grandchild’s tuition bill directly to the college without it counting against their annual gift tax exclusion or lifetime exemption, and without needing to file Form 709.

Utilizing Educational Savings Plans

Educational savings plans, such as 529 plans and custodial accounts, offer tax-advantaged ways for grandparents to save for college. They provide benefits like tax-free growth and withdrawals for qualified education expenses, with specific rules regarding ownership and control.

A 529 plan, also known as a qualified tuition program, is a state-sponsored investment plan designed to help families save for future education costs. Contributions grow tax-free, and withdrawals are tax-free when used for qualified education expenses, which include tuition, fees, books, supplies, and room and board. Grandparents can open and own a 529 plan for a grandchild or contribute to an existing plan owned by the parents. Grandparent-owned 529 plans offer control over the funds, including the ability to change the beneficiary if circumstances shift.

For large contributions to a 529 plan, individuals can utilize a “five-year gift tax averaging” strategy, sometimes referred to as superfunding. This allows a grandparent to make a lump-sum contribution of up to five times the annual gift tax exclusion amount in a single year, treating it as if spread evenly over five years. For 2025, a single grandparent could contribute up to $95,000 ($19,000 annual exclusion multiplied by five years) to a 529 plan without incurring gift tax or using their lifetime exemption, provided no other gifts are made to that beneficiary during the five-year period. If married, a couple could contribute up to $190,000 to the same beneficiary using gift splitting. This strategy requires filing Form 709 to report the election.

Custodial accounts, established under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA), are another option for saving for a grandchild’s education. Funds contributed to UGMA/UTMA accounts are an irrevocable gift to the minor, meaning the money legally belongs to the child. A custodian, typically a parent or grandparent, manages the account until the child reaches the age of majority (generally 18-21). At that point, the child gains full control over the funds and can use them for any purpose, not just education.

Investment income generated within these accounts may be subject to “kiddie tax” rules. For 2025, the first $1,350 of a child’s unearned income is tax-free, the next $1,350 is taxed at the child’s rate, and any unearned income exceeding $2,700 is taxed at the parents’ marginal tax rate or higher trust and estate rates.

Navigating Financial Aid Impact

Grandparent contributions can significantly influence a student’s eligibility for need-based financial aid. Understanding the rules of financial aid applications, particularly the Free Application for Federal Student Aid (FAFSA) and the CSS Profile, is important.

For the FAFSA, which determines eligibility for federal student aid, assets held in a grandparent’s name, including grandparent-owned 529 plans, are generally not reported as parental or student assets. This means the balance of a grandparent-owned 529 plan does not directly affect the student’s Student Aid Index (SAI). A significant change effective for the 2024-2025 academic year and beyond is that distributions from grandparent-owned 529 plans are no longer counted as untaxed student income on the FAFSA. This eliminates a prior disincentive where such distributions could reduce a student’s aid eligibility by as much as 50% of the amount received in the following aid year due to the “prior-prior year” rule. Grandparents can now make withdrawals from their 529 plans to pay for college expenses without negatively impacting federal aid eligibility.

Direct tuition payments made by a grandparent to an educational institution are not counted as student income on the FAFSA. Such payments bypass the student entirely, allowing grandparents to cover tuition costs directly without affecting federal aid.

While FAFSA rules have become more favorable, the CSS Profile, used by approximately 200 private colleges and scholarship agencies, may still require reporting of grandparent-owned assets or expected contributions. The CSS Profile collects more detailed financial information than the FAFSA, including assets held by non-parents. Some institutions using the CSS Profile may ask about anticipated contributions from relatives, which could potentially impact the student’s eligibility for institutional aid. Families applying to schools that require the CSS Profile should review the specific guidelines of those institutions.

Understanding Gift Tax Rules

Federal gift tax rules apply to grandparent contributions, determining if a gift is taxable, requires reporting, or reduces an individual’s lifetime exemption.

The annual gift tax exclusion allows an individual to give a certain amount of money or property to any number of recipients each year without incurring gift tax or requiring a gift tax return. For 2025, this exclusion is $19,000 per recipient. Gifts within this limit do not count against a grandparent’s lifetime exemption.

Married grandparents can significantly increase their gifting capacity through “gift splitting.” This allows a married couple to combine their individual annual exclusions, enabling them to give up to $38,000 per recipient in 2025 without using their lifetime exemptions or filing a gift tax return. Both spouses must consent to gift splitting by filing Form 709, even if no tax is due.

Gifts exceeding the annual exclusion amount begin to reduce the grandparent’s lifetime gift tax exemption. For 2025, the lifetime gift and estate tax exemption is $13.99 million per individual. This means that while Form 709 must be filed for gifts exceeding the annual exclusion, no actual gift tax is typically due until the cumulative amount of such gifts over a lifetime surpasses this exemption. The lifetime exemption is linked to the estate tax exemption, so using it during life reduces the amount that can be passed free of estate tax at death. This exemption amount is scheduled to be reduced by half starting in 2026.

Form 709 is required for reporting gifts that exceed the annual exclusion amount, for electing gift splitting with a spouse, or for certain other types of gifts. While filing this form is necessary to track gifts that reduce the lifetime exemption, it does not necessarily mean gift tax will be owed. The deadline for filing Form 709 is generally April 15 of the year following the gift.